Iceland let it's banks default, and is now doing rather well.

In fact, bank failure and then having the government only guarantee ~$50k of funds per person is a good way to hand wealth to the people and take it from corporations and the super wealthy.

> good way to hand wealth to the people and take it from corporations and the super wealthy

Hence the power that be try to prevent it best they can. In some cases, unsuccessfully (Iceland) and in others, a bit more successful (the US). But seemingly, they're only able to delay the inevitable, not completely prevent it.

> and is now doing rather well

I was going to write a shitty reply to this, but the more research I did, the more it seems actually this went pretty well for them. UK and NL governments that lost deposits in the Icelandic banks mostly got their cash back (eventually), there was recession and unemployment but not that much worse than other countries, and the country is in good standing again with the markets.

I would note that this is much much easier to do if your investors are foreign, rather than domestic pension funds, so it doesn’t bring down the government, though.

The issue is that major US banks are systematically important to the US and also everyone else. Practically nobody cares about Icelandic banks - not even their depositors if their deposits were protected by the state (which they were).

If a bank like JP Morgan were to fail, the event would be without exaggeration cataclysmic to everyone, even small local banks and credit unions. Even if ultimately the clients of JPM could be made whole, the weeks of uncertainty and frozen funds would single handedly obliterate the financial systems across the globe. It's the age old adage: "if you get margin called and get wiped out, it doesn't matter that you'd have recovered just 2 weeks later". The world as a whole is deeply leveraged. It's that leverage that affords us the ability to supercharge all the growth, from AI to drugs research, insurance, EV... everything. But that leverage comes at a cost, which is that systemically important institutions failing can have disastrous cascading de-leveraging effects.

I'm sure we'd more or less all survive and the world would recover, but it would likely be a 2008 GFC style scenario most likely.

The collapse of Landsbanki was absolutely not a nothingburger. Risked triggering a 21st Century Cod Wars: the UK government was forced to use organised crime laws to freeze its UK assets to protect UK savers in Icesave, to whom the Icelandic government did not clearly intend to extend protection.

Iceland's banks were full of money from people in the UK. It's a lot easier to default when there only a small political and economic price.

Is everyone just glossing over the fact that the feds make a profit on bailing the banks out? Seems like a win win to take over ownership in the event of a bank failure.

Was this definitely not accounting trickery? Like even the way money is created is intentionally convoluted and approximately 1% of the population even attempts to understand it. Can we really trust the accounting of bank bailouts which stood to be unpopular when the accounting produced a convenient outcome? Has anyone plausible analyzed this to a convincing level of detail?

This was explained by Jon Stewart on The Daily Show ad neausum in 2008 and was common discourse for years after. No. It's not accounting trickery. Rather than allow the company aka the bank to go fully bankrupt the government simply forces a sale of the shares of the bank to the government. The original stock owners basically take a cap gains loss (potentially based on their cost basis). The bank then continues to operate as normal. This prevents a run on the bank and keeps it stable. Then 2-3 years later the stock recovers and the government sells its shares. Since they bought low this is highly profitable. Anyway yes and yes. The 2008 bailout ended up making a profit for tax payers. Thanks Obama.

If there was a reliable profit to be made, a third party would do it.

I suspect the real profit is made by also being in a position to adjust laws and rules to make sure your investment survives, as well as turning low rated bonds effectively into government bonds. All those things are at the expense of others in the bigger picture.

3rd parties don't have the capital to front the losses. That's the whole point for the government to do it. The feds get the advantage that they basically get to force the existing creditors to sell at a loss. Presumably that's what everyone here wants. The existing owners to pay a penalty on the failure and for everyone else to remain whole if possible. Well that's exactly how a bank "bail out" works. So what's the actual problem? The only one's "hurt" are the owners who miss managed the business.

The "feds" as we used to know them are going extinct. They are all being replaced by GOP apparatchiks, who care only to look good to the Leader.

The U.S. also let a bank collapse and shit hit the fan across the world.

The global economy isn’t pivoting off Icelandic banks the way it is off US ones.

Big corporate borrowed the money already, so it will stay with some (other) big corporate in this scenario. The bankers who did it will see that coming and move their money elsewhere and keep their money as well.

What you suggest will hit normal persons.

What we really need is people going to jail that let stuff like that happen. Let them bear actual responsibility for their 1,000k+ salary.

We have similar FDIC insurance in the US. The solution is companies have many, many deposit accounts to still get the insurance, mostly for payroll purposes.

Could easily change the rules so real humans get government insurance, but companies do not.

And perhaps have the insurance pay out only once per year per person too, so that when multiple bank failures happen at once there is not much benefit to splitting funds.

But that defeats the purpose of depositor's insurance. The purpose isn't to make sure people get their money back; that's only a side effect. The point of depositors insurance is to avoid bank runs, which can be contagious.

The cause of the run isn't that important, and if you banking system collapses because companies pull out all their money you're not in a better position than if individuals do.

It's the middle class who gets screwed. The super wealthy and corps don't have their assets stored in banks.

Things have changed since 2009. It would be private credit which fails this time, not the banks.

Private credit is not supposed to be systemically important and it's not supposed to need bailing out. Maybe we'll find out how true that is in practice.

Why would you think that? You think pension funds and governments didn't invest this time? Because that's the problem, governments either investing everyone's money directly (to fund their own loans and expenditures, or should I say fund their own expenses using pension money without admitting that's what they're doing to pensioners) or indirectly force investments (you'll find pension funds worldwide are legally only allowed to invest in loans to the government and specific things the government allows (like politicians' charities). "For safety", of course, no other motivations there)

We can check if governments went back to their own tricks or not after 2008. What were the interest rates after 2008? Quick check ... yep, they went back to the old tricks.

When "shit hits the fan". Either governments really cut spending, leave pensioners without income and see their new loan interest spike to 10%+ (if they're lucky) ...

OR they do a massive cash injection saving the banks, and increase spending.

Which would you chose? It doesn't even matter. If you were the government and chose the first option, you would quickly find suddenly everyone across the political spectrum uniting to depose you. A decent chunk of people would literally not have any other choice but to do that.

(of course, as per usual governments aren't behaving "correctly" according to economic theory. If you take the old "government as spender of last resort" governments should have radically cut spending in the last 10 years, because there was no need for extra spending. If you take the new "government invests pensions", then of course government spending needs to be investment. In other words, governments only allowed to spend like a normal investor, expecting and demanding a return. Ie. no social spending increases. In practice governments increased spending at any cost, and so we're in trouble again)

Oh and should I mention that for any other entity investing pension money in loans to yourself is a very unique thing in law. It is THE ONLY financial crime where corporate structures do not protect management. You're the worldwide president of ExxonMobil? Doesn't matter. You do with employee pension money what government does with it? (ie. loan it to yourself, in this case ExxonMobil). You go to jail. Directly and long-term. In America. In Spain. In Japan. In fucking Vatican city.

Pensions will have exposure, probably through private credit, and probably in the range of 5% to 10% of assets. It's a lot, and it'll hurt people. But I'm not at all sure it is enough to require a bailout.

US government direct investment exposure is not likely to motivate a bailout in my view. The government might be motivated to bail people out for other reasons but not because they've lent too much.

Private credit is just some guy skimming 3% while risking your pensions.

You should really define “everyone else”.

Everyone else is literally everyone else. It doesn't matter what you have or what you do for a living, the collapse of the financial system is going to affect you negatively.

If a large private corporation is allowed to grow to the size of “the financial system”, regulators have failed their responsibilities, and need to unwind that immediately.

Can’t have your cake and eat it, too.

I agree. We should have dealt with this in 2009, but we didn't. There are still individual banks that are too big.